Behind the Scenes w/ David Brown - Film Finance is Real Estate Lending in Disguise.
Unmasking Film Finance: How It's More Like Real Estate Than You Think
Ever wonder how film finance really works? It might surprise you to learn it has a lot in common with something much more grounded: real estate lending. It's not all red carpets and Hollywood magic!
According to film producer David Brown (aka #davidbrown or #davebrown, and see more behind the scenes with David), film finance uses similar protections to real estate lending, but with a creative twist. Want to understand more about #filmmoney? Let's break it down.
Film Finance: More Than Just Hollywood Magic
Have you ever thought about what goes on behind the scenes to get a movie made? It's more than just finding talented actors and a good script. Film finance is a crucial part of the process, and it's structured in a way that provides security for lenders, just like in real estate.
The Single-Purpose Vehicle: Every Movie is a New LLC
Each film is set up as its own limited liability company (LLC), also called a single-purpose vehicle. This LLC is created specifically for that movie and acts as its own entity.
The LLC owns the contracts for everything related to the film. That includes distribution deals (both North American and international), agreements with writers, directors, and actors, and most importantly, the script rights.
Copyright as a Deed: Protecting the Script
Once the LLC pays for the script, it owns the script rights, which become the copyright of the film. To protect this copyright, producers file what's called a Form PA with the Library of Congress. This registers the copyright of the script.
Think of this copyright as the deed to a house in real estate. It's official documentation that proves ownership and provides federal protection. Just like you'd record a deed with the county when you get a mortgage, the copyright is filed with the Library of Congress.
Securing the Loan: The Copyright Mortgage
When filmmakers need funding, they often turn to film lenders. Like David Brown's FMLendingLLC. To secure the loan, lenders take what's called a copyright mortgage against the copyright of the script.
Just like a bank files a lien or deed against a house when you get a mortgage, film lenders file a copyright mortgage. This gives them a claim on the copyright if the loan isn't repaid.
Due Diligence: UCC Searches and Copyright Checks
Before providing financing or buying a film, it's essential to do your homework. This involves a couple of key searches.
First, a UCC search is done in the organizing state of the LLC. This search looks for any existing liens or judgments against the LLC.
Second, a copyright search is conducted with the Library of Congress. This search verifies who holds the copyright and if there are any existing copyright mortgages against it. These checks are vital for securing new financing or selling the film, protecting the lender's interest.
Valuing the Film: Beyond the Glitz and Glamour
So, we have the real estate pieces in place, but how do we determine the value of a film? Unlike real estate, there's no formal appraisal report you can order.
Collateral: Deconstructing the Film's Worth
Instead, lenders look at the various elements that make up the collateral for the film loan:
International pre-sales contracts: Agreements to sell the film in international markets before it's even made.
North American distribution deals: Agreements to distribute the film in the United States and Canada.
Tax credits: Incentives offered by certain states (like Georgia) to encourage film production.
For example, let's say a film has:
North American deal: $1 million
International pre-sales: $500,000
Tax Credit: $500,000
Total Value: $2 million
Loan-to-Value (LTV) Ratio: Minimizing Risk
Just like in real estate, film lenders use a loan-to-value (LTV) ratio to manage risk. They want to ensure their loan doesn't exceed the film's value.
For instance, if a film has a value of $2 million, a lender might target an LTV of 80%. That means they'd be willing to lend a maximum of $1.6 million.
Risk Mitigation: Accounting for the Unknown
It's also important to have a buffer to account for potential issues. This could include:
Tax credit qualification issues
Unexpected production costs
This buffer helps protect the lender's investment, providing financial security.
Key Takeaways: Protecting Your Investment
In both film finance and real estate, protecting your investment is crucial. By understanding the similarities between the two, you can gain a better grasp of how film financing works.
Tools like the UCCC1 lien with the organizing state and federal copyright mortgage are ways to mitigate risk. Keep in mind that the federal copyright mortgage supersedes the state level. By using these principles, you can understand film finance better. If you're interested in learning more, you can visit FilmMoney (www.filmmoney.com)